German top court rejects delay to euro ruling

Journalists wait in front of the German Constitutional Court during the hearing on the European Stability Mechanism (ESM) and the fiscal pact in Karlsruhe July 10, 2012.Alex Domanski

BERLIN (Reuters) - Germany's Constitutional Court will go ahead with a long-awaited ruling on Wednesday on the legality of the euro zone's new permanent bailout fund and budget rules, despite a last-minute legal challenge by a member of parliament.

On Tuesday, the court rejected an attempt to further delay a ruling on the European Stability Mechanism (ESM) and fiscal compact, which had previously been pushed back by months while the judges reviewed whether the German parliament is permitted under the constitution to ratify the treaties.

Further delay to the ruling on the ESM would have upset bond and currency markets which are already on tenterhooks awaiting the green light from the 17-member euro zone's biggest economy.

If the court upholds injunctions in its ruling at 10 a.m. (0400 EDT) on Wednesday, it will plunge the currency zone deeper into turmoil by casting doubt on Europe's ability to launch further rescue bids of heavily indebted southern states.

But legal experts believe the eight judges in the court's Second Senate will approve the bailout fund and budget package, while possibly imposing tough conditions that would limit Berlin's flexibility on future rescues.

Bielefeld University law professor Franz Mayer said the decision on Tuesday not to admit the last-ditch challenge lodged by conservative, eurosceptic lawmaker Peter Gauweiler was a "positive signal" for those hoping the court will allow the ratification of the new EU deal on Wednesday.

"It indicates that the judges know very well what they can do and what they cannot do and proves that they are well aware of the consequences of their decisions in the euro context," he said, adding that Gauweiler had a record of "filibustering".

Nonetheless, EU financial legislation is increasingly butting against limits the German constitution sets on national institutions relinquishing powers, so more cases seem likely.

Few German law professors expect the court to go as far as to signal on Wednesday that Germany must change its constitution and hold a referendum before it can take part in any further integration of the European Union. Such a vote could complicate Merkel's expected bid for a third term a year from now.

However, the constitutional complaint by Gauweiler, a member of the Bavarian regional party in Merkel's center-right coalition, could still upset European policymakers' latest attempts to solve the three-year-old sovereign debt crisis.

His case, lodged at the weekend after the European Central Bank announced plans for unlimited purchases of bonds of crisis-hit euro states to reduce their borrowing costs was not admissible for procedural reasons, legal experts said - because an ongoing case cannot be broadened to include new complaints.

"QUESTION MARKS" ON ECB

But some law professors said Gauweiler's argument - that Germany should not ratify the ESM until the ECB rows back on the bond-buying plan - could hold water and will pose a problem if Gauweiler, a frequent plaintiff in Karlsruhe, refiles his case.

The court did not go into its merits in a statement which said only that Wednesday's ruling "will go ahead as scheduled".

But Humboldt University's Kai von Lewinski said there was a "pretty good case" for the complaint by Gauweiler, who has some like-minded allies within Merkel's conservative bloc.

Lewinski said the constitution is interpreted as setting two key conditions on Germany's transfer of monetary sovereignty to the ECB, and both had been called into question, notably by the ECB plan for open-ended purchases of government bonds:

"There is a specific provision in the constitution which basically says the German state may only transfer monetary sovereign rights to the European Union if: there is a central bank that is independent - question mark now; and that has the primary goal of securing price stability - second question mark," he said.

While Germany's central bank has criticized ECB chief Mario Draghi's bond-buying plans, the chancellor backs the Italian while insisting that Bundesbank chief Jens Weidmann, once one of her senior aides, plays a useful role by warning of the risks.

Gauweiler declined to comment immediately on the formal rejection of his case, but if he does refile it, the red-robed judges in Karlsruhe are likely to have much more to say about the constitutionality of the euro zone rescue plan.

While the German court cannot stop the ECB from buying bonds as it has no jurisdiction over European institutions, Lewinski said, it does have the power to force Germany out of monetary union if this does not comply with the German constitution.